Revision of the Dutch Corporate Governance Code

Introduction

On 08 December 2016, the Monitoring Committee Corporate Governance Code (the Committee) published the new revised version of the Dutch Corporate Governance Code (the Code). The original Dutch version and an English translation of the revised Code can be downloaded from the Committee’s website.

The Code was introduced in 2003 and first amended in 2008. The revised Code will come into force as of the financial year starting on or after 01 January 2017. The Code applies to Dutch companies that are listed on a regulated market or comparable system, or - if their balance sheet value exceeds €500m - a multi trading facility or a comparable system. Compliance with the Code is based on the "comply or explain" principle pursuant to which listed companies are required to apply the principles and best practise provisions as set out in the Code, or provide reasons thereto in the event a particular principle or best practise provision is not complied with.

The below list provides a brief overview of the main changes implemented in the revised Code compared to the 2008 version of the Code.

The structure of the Code

The Committee has significantly altered the structure of the Code. Whereas the 2008 Code attributed various duties and responsibilities per function - management board, supervisory board, shareholders - the revised Code introduces a thematic structure. In the revised Code, it is set out per topic which actor fulfils what role in relation to that specific topic. According to the Committee, this new approach “helps to clarify relationships and connections, which promotes effective mutual dialogue”.

Long-term value creation

The most important change is the central role given to long-term value creation, a change driven by the Committee’s assessment that many recent incidents - such as accounting fraud, corruption and cartel activity - were rooted in a business model that focused too much on achieving short-term gains.

In the revised Code, long-term value creation forms the starting point for corporate governance. Under the supervision of the supervisory board, the management board should focus on long-term value creation, and take the stakeholder interests that are relevant in this context into account. In the annual report, the management board should present its view on long-term value creation and the strategy for its realisation, and give account of the contributions made over the relevant financial year.

Culture

Long-term value creation requires a culture aimed at that. Accordingly, the management and supervisory boards are expected to create a culture which promotes desired behaviour and encourages employees to act with integrity, and to lead by example. Whilst it addresses culture, the Code does not prescribe what the culture is or should be, leaving it to the management board to develop a culture that is appropriate for the business and to explain this in the annual report.

Risk management

The management board is responsible for establishing the company’s risk appetite, and for the measures that are put in place in order to counter the risks being taken. In the annual report, the management board must render account on the company’s risk management, in which context it must describe the material risks - financial and otherwise - facing the company in relation to its risk appetite. In its clearly substantiated control statement, the management board must declare that the control systems provide reasonable assurance that the financial reporting does not contain material inaccuracies and that the preparation of the financial reporting on a going concern basis is justified, and that shortcomings in the effectivity of the control systems as well as the material risk and uncertainty for the company’s continuity for the following 12 months are adequately disclosed in the annual report.

Internal audit function

Under the revised Code, the position of the internal audit function is strengthened. The revised Code’s starting point is that a company should have an internal audit function. In the event that it does not, the supervisory board should annually assess whether adequate alternative measures have been taken and consider whether an internal audit department should be established. The supervisory board must give accountability of its assessment and conclusions in the annual report. The internal audit department must report in full to the management board and in summary to the audit committee, and must also inform the external auditor. It should have direct access to the audit committee and the external auditor.

Supervisory board - term of appointment and independency

The term of appointment for supervisory board members has changed. Under the revised Code, supervisory board members can be appointed for two four-year periods. Thereafter, a supervisory board member can be reappointed up to a maximum of two more two-year periods, subject to the supervisory board setting out the reasons for the reappointment in the annual report.

Whereas under the previous versions of the Code, there could be only one “dependent” supervisory director, the revised Code is more nuanced in the sense that it is possible to have more than one representative of a ≥10% shareholder sit on the supervisory board without breaching the independence requirements, be it that the majority of the members of the supervisory board and its chairman must remain independent. The Committee’s rational for this more lenient approach towards major shareholder representation is that long term value creation is enhanced by involved shareholders.

Executive committee

Companies increasingly work with a management board that has only two members, the CEO and the CFO, and an executive committee consisting of members of senior management and the members of the management board. The executive committee fulfils an important role in the management board’s decision-making, whilst the members of senior management fall outside the scope of direct supervision by the supervisory board. Companies that have established an executive committee must ensure that the system of checks and balances of the two-tier system are duly taken into account. This means, among other things, that the management board’s expertise and responsibilities are safeguarded and the supervisory board is informed adequately. In the annual report, account has to be rendered of the choice for having an executive committee, its role, duties and composition, and how the interactions between the executive committee and the supervisory board are organised.

Remuneration

Compared to the 2008 Code, a reduced number and less detailed provisions related to the topic remuneration are included in the revised Code. The Code has returned to the core principles of a remuneration policy for the management board that is clear and understandable and focusses on long-term value creation. New elements are the requirement to take internal pay ratios within the organisation into account, and the requirement for the management board to provide its view regarding its own remuneration. The supervisory board must render transparent account in the annual report of the remuneration that is ultimately awarded.

The provisions on the remuneration of supervisory board members are largely in line with those of the 2008 version of the Code. The remuneration of supervisory board members should promote an adequate performance of their role and should not be dependent on the results of the company. Supervisory board members may not be awarded remuneration in the form of shares or options.

One-tier governance structure

Contrary to earlier reporting, there will not be a separate version of the Code for companies that have established a one-tier board structure. The revised Code is generally aimed at companies with a two-tier board, but also applies to companies that have established a one-tier board. One principle and a number of best-practise provisions that apply specifically to companies with a one-tier board structure have been included in a separate chapter.

Diversity

The scope of the diversity policy that the supervisory board must draw up has been expanded and now covers the supervisory board, the management board and the executive committee, if applicable. It must address the concrete diversity targets and the diversity aspects that are relevant to the organisation, such as nationality, age, gender, and education and work background. In the annual corporate governance statement, the diversity policy and its implementation must be explained, and the results of the policy in the past financial year disclosed. If the composition of the management board or the supervisory board is not in accordance with the diversity targets or with statutory gender balance requirements, it must be explained which measures are taken to achieve these targets and requirements and when they are likely to be achieved.

Comply or explain

Compliance with the Code is based on the "comply or explain" principle. In the revised Code, the requirements for explanations for non-compliance are bolstered. In the event of non-compliance with a principle or best practice provision, it must be made clear why and to what extent the company deviates. If temporary, an indication must be given of when the company intends to comply, and where applicable, the alternative measure taken must be described.

Concluding remarks

The revised Code will come into force as of the financial year starting on or after 01 January 2017, which means that companies will need to report on their compliance with the revised Code for the first time in the annual report for the financial year 2017. The revised Code has a different structure and materially deviates on a number of topics from the 2008 version of the Code. Dutch listed companies consequently will have to update and align their corporate governance structures and policies with the revised Code. This update may also require changes to be made to the regulations of the management board, the supervisory board and its sub-committees and even the articles of association.